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The short- and long-run inconsistency of the expansionary austerity theory: a post-Keynesian/evolutionist critique

Alberto Botta ()

Journal of Evolutionary Economics, 2020, vol. 30, issue 1, No 7, 143-177

Abstract: Abstract This work provides a critical analysis of the expansionary austerity theory (EAT). The focus is on the theoretical weaknesses of the EAT—the extreme circumstances and fragile assumptions under which expansionary consolidations might take place. The paper presents a simple theoretical model based on both the post-Keynesian and the evolutionary/institutionalist schools. First, it shows that well-designed austerity measures hardly trigger short-run economic expansions in the context of expected long-lasting consolidation plans dealing with remarkably high debt-to-GDP ratios, when the so-called “financial channel” is not operative (i.e. in the context of monetarily sovereign economies), or when the degree of export responsiveness to internal devaluation is low. Even in the context of non–monetarily sovereign countries (e.g. members of the eurozone), austerity’s effectiveness crucially depends on its highly disputable capacity to stabilize immediately fiscal variables. The paper then analyzes some possible long-run economic dynamics. Path dependency and cumulativeness make the short-run effects of fiscal consolidation elements of paramount importance to (hopefully) obtaining any medium-to-long-run benefit. Should these effects be even slightly contractionary, short-run costs can breed an endless spiral of recession and ballooning debt in the long run. If so, in the case of non–monetarily sovereign countries debt forgiveness may emerge as the ultimate solution to restore economic soundness. Alternatively, institutional innovations such as those adopted since mid-2012 by the European Central Bank are required to stabilize the economy, even though they are unlikely to restore rapid growth in the absence of more active fiscal stimuli.

Keywords: Fiscal policy; Expansionary austerity theory; Post-keynesian/evolutionist macro models; E12; E61; E62 (search for similar items in EconPapers)
Date: 2020
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Working Paper: The Short- and Long-run Inconsistency of the Expansionary Austerity Theory: A Post-Keynesian/Evolutionist Critique (2016) Downloads
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DOI: 10.1007/s00191-018-0567-3

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